[Opinion] Practical Approach to Handle the Notice Issued By GST Department Pertaining to Secondment of Employee(s)

Ruchesh Sinha & Prakash Mehta – [2023] 155 taxmann.com 444 (Article)

The Introduction

It was the year 1991 which opened the gates for the entry of various Multinational Companies (“MNC’s”) in India. Gradually after the liberalisation was adopted in our country, it has experienced a commendable presence of MNC in India followed by the foreign direct investment inflows to the Indian economy. These MNC’s have been playing an important role in the economic growth and development of the country. The Government on its part has duly recognized the vital role played by such MNC’s, it has eased and enhanced the scope for their participation in the Indian economy and continues to do so. Usually, MNC’s prefer to transfer their experienced and skilled personnel to India to take care of operations of their Indian arm. For this purpose, the employees are deputed in initial set-up stage and thereafter for taking care of management and supervision of activities of their Indian arm. In cases of extended stay, ranging from few months to year, the parent company considers to seconds its employees to India. These arrangements are structured by way of secondment agreement(s).

The Arrangement

At the cost of repetition, it is stated that in the case of MNC’s it is usual practice for a foreign parent or group entity to depute or second its employees to the Indian subsidiary or group company. This is in accordance with the ‘global policy’ followed by such MNC’s and the so-called foreign employees, technically considered as ‘expatriate’ are posted and deputed in other than their home country, in which country such MNC’s wishes to operates. It may be stated that in a classic secondment arrangement, employees of overseas entities are deputed to the host entity (Indian associate) on the its request to meet its specific needs and requirements of the Indian associate. During the arrangement such expatriate viz., the ‘secondees’ work under the control and supervision of the Indian company and in relation to the work responsibilities of the Indian affiliate. Social security laws of the home country (of the secondees) and business considerations result in payroll retention and salary payment by the foreign entity, which is claimed as reimbursement from the host entity i.e. the Indian company. The main reason that the subsidiary companies in India to carry on its own business in a more efficient and effective manner by using the expertise of deputed or seconded employees from their parent companies. Accordingly, a secondment agreement is entered between Indian company with its foreign service capturing such arrangement which contains the details of employment, the consideration, tenure etc, depending on the facts of each case.

The GST prospective

Speaking generally, the thinking behind such arrangement of secondment is that the same does not attracts the provisions of GST Act (erstwhile the Service Act) as such arrangement does not fall under the ambit of any ‘service’. The reason is that there is an employer-employee relationship between company and seconded/deputed employees. In other words, it is a common accepted phenomena that the services rendered by the deputed/seconded employee to its employer during the course of employment is not treated as supply and will not come under purview of GST. Based on the same understanding, the secondment arrangements are considered as out of ambit of GST, as employee-employer relationship is neither a supply of service, nor a supply of goods under the provisions imposing GST.

Whereas the contagious issue and also the thrust of the GST department is that where the foreign entity has seconded its employees in Indian entity wherein the expatriates qualify as employees of Indian entity, the transaction between the expatriate and Indian entity will be treated as ‘supply of services’ and accordingly, GST will be applicable on consideration paid by the Indian entity to the expatriates. The said arrangement seems to be simple and hassle free, however, taxation of such secondment arrangement under the GST provisions has once again become a controversial issue in view of the judgment of the Supreme Court in the case of CC, CE & ST v. Northern Operating Systems (P.) Ltd. [2022] 138 taxmann.com 359/2022 (61) GSTL 129/92 GST 792, which albeit pertains to the erstwhile Service Tax regime but are also applied to the present GST regime as the former has subsumed in the latter.

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